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K-Waves

The possibility of the world ending this December still makes the rounds, often as a joke. Very few people believe it will happen, and certainly no Mayan ever predicted such a thing. But the idea caught on for an obvious reason: we do appear to be at the end of some kind of cycle.

Then again, we’re also at the start of another.

While there may be morbid comfort in the idea that the world might end, an emerging new world should be much more comforting. That’s why the K-Wave concept is likely to catch on. This theory is not only more hopeful, it’s robust enough to explain an awful lot about our world from investing to generational identification – and more.

The name “K-Wave” comes from Nikolai Kondratieff, a Russian economist who helped craft the Soviet Union’s first 5 Year Plan. He took a long view of history and fitted his efforts for the Motherland into a grander plan. In 1926 he published his master work, “Long Waves in Economic Life”. Analyzing history back into biblical times, he saw cycles of growth and stagnation fitting cycles of roughly every 52 years that matched the turn of the seasons. This appeared contrary to the revolutionary dogma of his nation. Kondratieff was sent to the Gulag, the natural destination for free thinkers and other trouble makers, and apparently died there in 1938.

The idea caught on in the West after WWII when it became clear that his predictions were accurate, and the term K-Wave entered economic thought. His seasons, about 13 years each, are as follows:

Spring – Inflationary Growth – a period when opportunities abound and there is no shortage of money to invest in them.
Summer – Stagflation – the new opportunities exhaust themselves but the inflation caused by a lot of cash continues.
Autumn – Deflationary Growth – everything settles down and the population lives fat and happy for a while.
Winter – Depression – The excesses of the Autumn harvest become unsustainable and everything collapses.

The most common way of reporting K-Wave theory is its most practical application, “secular market analysis”. Secular refers to something that is so long-term it appears permanent, and the markets in question are the stock markets. The idea is that we go from a long term Bull Market with large gains for little thought into a Bear market where everyone is so scared that even good stocks can’t get respect. It’s also known simply as “business cycles”. Here is a chart of the Dow Jones Industrial average since 1900, separated into secular Bull and Bear Markets:

Secular Bear

Duration

Avg Yearly Ret

Secular Bull

Duration

Avg Yearly Ret

Markets

(Years)

(Dow)

Markets

(Years)

(Dow)

1906-1921

16

1.58%

1922-1928

7

17.20%

1929-1949

21

1.69%

1950-1965

16

10.60%

1966-1982

17

1.59%

1983-1999

17

15.30%

2000-?

Several features stand out immediately. The first is that the Bull markets are the Spring and Autumn described by Kondratieff, with the Bears the Summer and Winter. These “seasons” are also much longer than 13 years each – indeed, there was 71 years between the Depressions of 1929 and 2000-2001 in this example. And yes, K-Wave analysis does support the idea that we now ending a Depression of sorts, the one I call a “Managed Depression”.

Why is the period longer than Kondratieff’s original analysis? Once again, K-Wave cycles go to the start of recorded history. It appears to be that as we are living longer, the cycles repeat themselves on roughly a human lifespan. It appears that they are based on our ability to forget what our Grandparents were trying to tell us. Take a look at the same chart and see how the last year of “seasons” roughly correlates with generational identification:

1929-1949

Traditionals

1950-1965

Baby Boomers

1966-1982

Gen-X

1983-1999

Millenials

2000-?

This is the point at which K-Wave analysis becomes tricky. If you do your own research on the topic you’ll find many websites that are full of lengthy and dense prose and tightly annotated graphs. It’s easy to conclude that K-Wave theory is something for nutcases. But it is critical to note that secular market theory is generally accepted by prudent investors that have been around for a while.

The problem is that K-Waves explain so much that their acolytes tend to become mired in the details that fit their analysis. They fit the “Life in Hell” comic strip about types of Professors, including the “Single Theory to Explain Everything Maniac” – the warning is that the theory may be correct. The general version of the theory, taken to an extreme, does have its detractors.

What we can say is that the actual Depression is probably lifting today, although we can’t be sure where history will end it until it is catalogued and named in popular culture. The Spring will arrive sometime later, probably around 2017 unless something awful happens in the meantime. Hard times do not last forever.

The world isn’t ending, although to a Midwesterner it may feel that way when the blizzards arrive on a typical March. It’s about to begin again as a new world, one where even longer cycles that take up multiple K-Wave years lift other nations into prominence. But that is another topic altogether.

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29 thoughts on “K-Waves”

The idea of business cycles is not new or even controversial I think. Fitting it into some bigger scheme is difficult but makes sense. You probably can take it too far but that has to inform how you grow up and everything else.

There is so much more to say on this topic. Once again you have only started to scratch the surface. I have heard of this before and appreciate the summary which is very good. But how can we apply this and move forward? As investment advice it is very solid and I have seen many well written articles describing how to invest in a secular bear market. But if it goes much further than that this needs to be taught. Thoughts?

Yes, this needs to be taught. It is an excellent tool for getting people to think beyond their own little world and to understand that most of what we think is unique is, perhaps, unusual but not unheard of.
In a Bear Market like we have now, topics like this are very common. “It’s not your fault, we’re in a secular Bear Market” seems to be the general thinking – but no one ever says, “I’m not brilliant, it’s a secular Bull Market”. Human nature, again, at work.
But this has great implications for a retirement scheme based on the stock market, among other things. We do need to understand this and what it means for the course of our lives.

This all has to end someday – but it could end very badly even if this is only a cycle. The debt that has piled up will cripple generations to come no matter what. I don’t think that anything in history has been quite the same other than maybe the collapse of some empire. There is no way that we can keep going the way we are and it will have to end badly even if there is a “spring” in the near future.

The debt accumulated will either be defaulted on or grown/inflated into. There are no other options. It cannot be handed over to the next generation because I am fairly certain they WILL simply default on it. My kids are very clear on that point.
As to the “end of the empire”, once again that is not necessarily the worst thing in the world. We will not be overrun by barbarians like Rome, but we could settle back like the UK. But yes, we cannot continue as we did in the 2000s for any length of time – the deficit spending was severe through that whole period.